Key inflation index rise puts pressure on wages

The measure of inflation most commonly used in wage bargaining rounds rose to its highest level for eight years despite the Government's preferred reading holding steady in October.

The Retail Prices Index, which includes housing costs such as the Council Tax, rose by 0.1pc to 3.7pc in the year to October, its highest level since 1998. The increase took the shine off a lower-than-expected 2.4pc annual rise in the consumer prices index, in which higher university tuition fees and food costs were offset by cheaper petrol.

Michael Saunders, an economist at Citigroup, said: "These figures will not remove the MPC's worries about possible pass through from high headline inflation to inflation expectations and pay over the winter."

Although the increase in the CPI has now been higher than the Bank of England's 2pc target for six months in a row, the softer-than-expected data is thought to reduce the chance of another interest-rate rise in the first quarter of 2007.

The Bank's monetary policy committee raised rates by a quarter point to 5pc earlier this month in a bid to dampen incipient inflation pressures. The pound fell against both the dollar and the euro as traders bet rates have peaked.

Jonathan Loynes at Capital Economics said the increase in the broader RPI measure would "keep the MPC nervous about a pick-up in wages growth in the forthcoming pay round."

Education costs rose by 9pc during October as universities took advantage of a higher £3,000 fees ceiling. Food prices rose after falling last year. Gas and electricity bills rose again. These were offset by a 5pc fall in petrol prices to an average of 85.9p a litre, which took 0.1pc off the headline inflation rate.

Attention will focus on today's quarterly inflation report from the Bank of England, which is expected to warn that if rates stay at 5pc inflation will risk overshooting the target level over the next two years.

Howard Archer at Global Insight said: "Wage settlements could move significantly higher in the 2007 pay rounds. It is far to soon for the Bank of England to relax."